Question

Although the potential loss incurred from purchasing a call option is finite, the potential loss to the seller is unbounded. Explain why the potential loss that the seller may incur is unbounded.

Answer 1

A short call (for seller)strategy is one of two simple ways options traders can take bearish positions. It involves selling call options, or calls. Calls give the holder of the option the right to buy an underlying security at a specified price.

If the price of the underlying security falls, a short call strategy profits. If the price rises, there’s unlimited exposure during the length of time the option is viable, which is known as a naked short call. To limit losses, some traders will exercise a short call while owning the underlying security, which is known as a covered call.A Short Call is exposed to unlimited risk; it is advisable not to carry overnight positions. Also, one should always strictly adhere to Stop Loss in order to restrict losses.

Details pay off diagram:

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